Trade Secrets: 10 Keys to Successful Litigation
| Publication year | 2016 |
| Pages | 35 |
| Citation | Vol. 45 No. 1 Pg. 35 |
Articles
Labor and Employment Law
Trade Secrets: 10 Keys to Successful Litigation
By Jessica Brown, Tafari Lumumba.
Labor and Employment Law articles are sponsored by the CBA Labor and Employment Law Section to present current issues and topics of interest to attorneys, judges, and legal and judicial administrators on all aspects of labor and employment law in Colorado.
About the Authors
Jessica Brown is a litigation partner at Gibson, Dunn & Crutcher and a member of the firm's Labor and Employment and Class Action practice groups. She has experience defending nationwide and statewide class and collective actions, and has tried and mediated non-class claims before federal judges and arbitrators across the country. She is the current president of the Colorado Women's Bar Association—jbrown@gibsondunn.com. Tafari Lumumba is a litigation associate at Gibson, Dunn & Crutcher and a member of the firm's General Commercial Litigation, Securities Litigation, and White Collar Defense Investigations practice groups—tlumumba @gibsondunn.com. Jessica is grateful for Tafari's tremendous assistance in preparing this article.
Trade secrets litigation is growing exponentially in some jurisdictions, and companies can find themselves on either side of the issue: seeking to protect trade secrets from being exploited by departing employees or a competitor, or facing suits when their employees take or improperly use confidential information from a former employer or competitor. This article describes 10 keys to successful trade secrets litigation for practitioners without significant experience in this area.
Trade secrets litigation touches a diverse range of corporate actors. Companies can be either plaintiffs suing to protect their proprietary information or defendants rebutting accusations of stealing a competitor's "secret sauce." Individuals starting a new company or accepting a promising job offer can be subject to litigation if they take their former employer's alleged trade secrets to the new venture. With trade secrets theft constituting an estimated 1% to 3% of gross domestic product in the United States, [1] and trade secrets litigation growing "exponentially" in some jurisdictions, [2] corporate actors would be wise to prepare to play offense and defense in this space.
The hypothetical plaintiff in a trade secrets action should consider who could target company intellectual property. Potential perpetrators include (1) current and former employees, (2) competing companies, (3) foreign governments, (4) business partners, and (5) common criminals (hackers, fraudsters, etc.). Hypothetical defendants, on the other hand, should consider who could be high-risk targets for a trade secrets lawsuit. These persons include (1) new hires with third-party information—and their employers, (2) companies hiring "teams" of employees, and (3) joint venture partners.
Despite highly publicized cases of thefts allegedly perpetrated by foreign nations, [3] most cases involve persons known to the trade secrets owner. [4] An empirical study of trade secrets litigation in state and federal courts identified most alleged misappropriators as business partners, current employees, and former employees.[5] Indeed, half of employees surveyed in a 2013 study admitted to having taken company data from former employers and 40% planned to use that data at their new jobs.[6]
If a litigant is armed with knowledge of the law and best litigation practices, there are indeed tangible steps that can be taken to secure an advantage in a trade secrets lawsuit. This article first provides a brief overview of how trade secrets and misappropriation are defined under Colorado law. Then it offers practice tips for when litigation moves from a hypothetical risk to a bet-the-company reality.
What Are Trade Secrets?
The Colorado Uniform Trade Secrets Act (CUTSA) defines a "trade secret" as:
the whole or any portion or phase of any scientific or technical information, design, process, procedure, formula, improvement, confidential business or financial information, listing of names, addresses, or telephone numbers, or other information relating to any business or profession which is secret and of value. To be a "trade secret" the owner thereof must have taken measures to prevent the secret from becoming available to persons other than those selected by the owner to have access thereto for limited purposes.[7]
Colorado courts consider the following factors to determine whether a trade secret exists:
1) the extent to which the information is known outside the business;
2) the extent to which it is known to those inside the business (i.e., by the employees);
3) the precautions taken by the holder of the trade secret to guard the secrecy of the information;
4) the savings effected and the value to the holder in having the information as against competitors;
5) the amount of effort or money expended in obtaining and developing the information; and
6) the amount of time and expense it would take for others to acquire and duplicate the information.[8]
With these criteria in mind, Colorado courts have found trade secrets to encompass myriad categories of information, including customer lists, [9] candidate data for a recruitment agency (including compiled employment histories and job qualifications), [10] and an "Operations and Procedures" manual for franchisees.[11] A Colorado court also ruled that a plaintiff sufficiently pleaded that "login information for profiles" and lists of MySpace "friends" were trade secrets for the purpose of surviving a motion to dismiss.[12]
In other jurisdictions, courts have found formulas, [13] designs, [14] methods, [15] plans, [16] and even information regarding what does not work (knowledge "developed negatively") to merit trade secrets protection.[17] And similar to the MySpace friends list case, [18] plaintiffs in other jurisdictions have also explored social media trade secrets theories, litigating to protect a party’s LinkedIn contacts[19] and a company’s 17, 000 Twitter followers.[20]
What Is Misappropriation?
Misappropriation liability under CUTSA turns on whether a party employs, has knowledge of, or should have knowledge of improper means in the acquisition, disclosure, or use of trade secrets. "Improper means" under the statute includes "theft, bribery, misrepresentation, breach or inducement of a breach of a duty to maintain secrecy, or espionage through electronic or other means."[21]
The statute notably does not require that the trade secrets be used for liability to attach. If a person merely acquires a trade secret while knowing (or having reason to know) that the trade secret was "acquired by improper means, " CUTSA finds liability. [22] Similarly, a party can be held liable for disclosing or using a trade secret if it did the following:
1) used improper means to acquire knowledge of the trade secret; or
2) at the time of disclosure or use, knew or had reason to know that such person’s knowledge of the trade secret was:
a) derived from or through a person who had utilized improper means to acquire it;
b) acquired under circumstances giving rise to a duty to maintain its secrecy or limit its use; or
c) derived from or through a person who owed a duty to the person seeking relief to maintain its secrecy or limit its use.[23]
Keys to Successful Trade Secrets Litigation
When embarking on trade secrets litigation, whether as a plaintiff or a defendant, it is useful to have in mind the 10 keys to success that follow.
Key #1—Secure, Collect, and Review Electronic Evidence
Federal courts have expressed varying standards regarding when the obligation to preserve documents begins. A Colorado federal district court held that putative litigants must "preserve documents that may be relevant to pending or imminent litigation."[24] Once obligations begin, counsel for corporate litigants should circulate a notice (i.e., a document retention notice or "litigation hold") to employees with potentially discoverable information. Counsel should describe the litigation, the potential locations of discoverable documents (laptops, smart phones, desktops, filing cabinets, etc.), the types of materials covered (e.g., emails, text messages, network documents), and the subject matter of the information that should be retained.[25]
Corporate litigants should also ensure that automatic document destruction protocols are suspended. Failure to preserve relevant evidence—even if pursuant to an automatic document destruction protocol—may result in an "adverse inference" instruction allowing jurors to presume the missing evidence was unfavorable to the sanctioned party. [26]
While potential court-ordered sanctions should be sufficient incentive for all litigants to preserve discoverable data, companies in a trade secrets action should immediately collect electronic communications and image employee devices to develop evidence regarding the alleged misappropriation. More than half of employees polled in a 2013 survey admitted to sending company documents to personal email addresses, 41% downloaded information to personal tablets/smart phones, and 37% sent documents to file-sharing applications such as Dropbox and Google Docs.[27] These electronic data transfers are valuable sources of evidence, and counsel should pay close attention to employee communications with third parties, documents sent to personal email accounts, and forensic evidence that the employee moved or deleted information from a company computer (or installed data-wiping programs such as CCleaner).
Key #2—Perform an Early Case Assessment
Begin with the end in mind. With litigation holds sent to custodians and potentially key evidence and discoverable data...
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